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Medicare’s $8 billion advantage

One of the significant reforms in the health care law was to put private Medicare plans on a more equal footing with the traditional government program. The Patient Protection and Affordable Care Act altered the payment structure in which the private plans, known as Medicare Advantage, were essentially overpaid in comparison to the traditional fee-for-service plan, receiving about $114 for every $100 spent on traditional Medicare. With about a quarter of Medicare beneficiaries now enrolled in private plans, the change was projected to save a significant amount of money: $145 billion over nine years.

Critics of the change, including Republican lawmakers, contended that it would result in less generous packages for seniors from the private plans, which used the extra payments to entice seniors to sign up. Supporters said that was the point: While promoting competition among private plans could drive cost reduction and quality, paying private plans more than the traditional model was wasteful and counterproductive.

The law has brought costs down; private plans currently receive about $107 for every $100 to traditional Medicare and are on track to get to parity as the law continues to be phased in. But the immediate sting of the cuts was significantly lessened by the Obama administration’s move to expand and speed up a program to pay bonuses to high-performing programs. Under the health-care law, plans that received four or more stars out of a five-star rating system would be eligible for extra payments to reward their higher-quality performance. Instead, the Centers for Medicare and Medicaid Services decided — in the biggest such “demonstration project” it has ever undertaken — to make bonus payments available to plans with three or more stars and increase the size of bonuses this year and next.

Think of it as the Lake Wobegon-ization of Medicare Advantage: As the Government Accountability Office (GAO) concluded, “Rather than rewarding only high performing plans, most of the additional payments made under the demonstration will accrue to average performing plans.” The Medicare actuary estimates that change will cost $8.35 billion over 10 years and the biggest beneficiaries will be average-performing plans with three-star and 3.5-star ratings. The change will offset more than a third of the cost savings in Medicare Advantage during the three years of the demonstration project, including nearly three-fourths of the scheduled savings in 2012.

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The theory behind the change, according to administration officials, was to provide incentives to more plans to quickly improve their quality. It also had the political benefit of shielding services to seniors from being cut in an election year. But as both the GAO and the Medicare Payment Advisory Board have noted, the design and the national scope of the project make it impossible to measure whether it achieves better results than would have been obtained otherwise — that is, without spending $8 billion. Health and Human Services Secretary Kathleen Sebelius should follow the GAO’s advice and cancel the bonus plan.